Ever since Bank of Canada governor Tiff Macklem and his board decided to cut the Bank of Canada’s policy interest rate from 5% to 4.75% – the first rate cut since the 2020 pandemic – which was announced in Ottawa on June 5th, 2024, individuals, businesses, and the capital markets have been waiting impatiently for another rate cut in July.
While some economists are cautious about predicting another rate cut come July 24, the general consensus is that the Bank of Canada has to, and will, cut the rate again.
Why Will the Bank of Canada Cut the Interest Rate?
Surprisingly Low Inflation Numbers in June 2024
On July 16, 2024, Statistics Canada released its latest inflation report. This indicated that annual inflation had cooled to 2.7% in June.
This was a notable decrease from 2.9% inflation rate in May.
This came as a pleasant surprise to the markets which had predicted that inflation would only drop to about 2.8% in June.
This unexpected gift meant that the Bank of Canada’s inflation-cooling policies were working and the economy was moving towards the Bank of Canada’s target of 2% inflation.
Given this positive new data available to the Bank of Canada, the markets thus predicted another consecutive rate cut was in the cards.
Rising Unemployment Rate
Recent economic data also indicated that the unemployment rate was rising.
In June, the Canadian job market data demonstrated that the Canadian economy had lost steam. The economy lost 1,400 jobs in June. And the unemployment rate rose from 6.2% in May to 6.4% in June.
This indicates that the economy needs a positive stimulus in the form of another rate cut to reenergize the economy.
Decline in Retail Sales
Statistics Canada also released data on retail sales on July 19th, 2024, which indicated that, in line with the higher unemployment rate and the pain felt from high interest rates, Canadians had reduced their consumer spending in May 2024.
Retail sales dropped by 0.8% to $66.1 billion.
Even more importantly, this decline was not an aberration or linked to a specific product or sector. Retail sales were lower in 8 of the 9 sub-sectors that Statistics Canada tracks.
In order to stimulate consumer spending in key sectors, another Bank of Canada interest rate cut is necessary.
Negative Business Growth Forecasts
Finally, numerous independent economic forecasts demonstrated that business growth had stalled and had been replaced by negative expectations for Canadian business growth.
Another Bank of Canada interest rate cut is necessary to encourage business investment and further growth in businesses.
Common Sense: A Single Interest Rate Cut Doesn’t Change Much
Historical data has always proven that a single small rate cut of, say 0.25%, never makes a real dent in a fight against inflation.
It never really makes sense to only cut the policy interest rate by 25 basis points and then wait for multiple quarters to see how the economy performs.
The effect of a rate cut is generally evident in the economy around 18 months after it is implemented.
So it always makes more sense to do at least two rate cuts in a row and then pause to see how the economy reacts to these new interest rates.
What Does the Average Canadian Think?
Canadians who have variable home mortgages and people dealing with higher living costs are desperately waiting for rate cuts to ease their financial burdens, at least, a little.
However, recent polls indicate that most people don’t even believe that continued interest rate cuts expected this year would be sufficient to reduce their financial strains.
This same financial burden, of course, is felt by businesses with business loans and increased expenses. This is why business loan brokers in Canada are working hard to secure the lowest-cost business loans for their clients in this ever-changing interest rate environment.
As such, everyone is watching closely to hear what Bank of Canada Governor Tiff Macklem has to say on July 24, 2024 in Ottawa.